Low-fee and personalized ETF Portfolios

Low-free and personalized ETF Portfolios

Investing is simple but it can be very hard at times.

For one, all investors are constantly encouraged to take the long-term view. Focusing on what might happen 10, 20, or 30 years from now is not easy. You’ll need some major financial discipline to stick to a solid plan. Heck, you’ll need a solid plan in the first place. Two, beyond the financial plan there is the execution and monitoring of what you’ve put in place. There is the delicate re-balancing act across all various asset classes. And I’m just scratching the surface of what you need know and do as a Do-It-Yourself (DIY) investor.

I know what’s involved. I am a DIY investor – I’ve chosen this path purposely. This doesn’t mean things are always easy. Besides, like most things in life, knowing what you should do and actually doing it are two different things. Bad (investing) behaviour happens – and I fight it sometimes.

Thanks to the FinTech revolution there are now some great low-fee and hassle-free ways to invest – that do not require the same level of effort some DIY investors take on or fight themselves on. There can be beauty in simplicity. This means for most Canadians a diversified, low-cost portfolio made up of various Exchange Traded Funds (ETFs) can serve your financial future very well.

With ModernAdvisor Custom Portfolios you can now take a more holistic view of your financial situation – to design and get low-cost help to manage your personalized portfolio. This portfolio will take into account all your asset classes, wherever they are held, including real estate. This service is now available at no additional cost to clients who invest $150,000 or more with ModernAdvisor. Here’s what Navid Boostani, co-Founder and CEO highlighted to me about this low-cost, advisor supported approach:

“Traditionally, the level of service offered with our Custom Portfolios would cost more than 1% per year, and would often require a much higher account balance. Now you can get a customized portfolio for an annual fee of 0.40% or less, which is unprecedented in Canada.”

So, how does this low-cost Custom Portfolio work? I took a test drive myself to see what my portfolio could look like and how it compares to my DIY investing approach.

Step 1 – What do you have? (Nice to meet you)

Navid directed me to a link on his site – to answer a few questions and schedule a brief meeting with one of his advisors. (Note: at the time of this post there are three advisors on the team; they have either a chartered financial analyst (CFA) and/or chartered investment manager (CIM) designation).

Here are some of the questions I answered to help my advisor get a good picture of our financial situation:

What are our existing investment holdings and assets? What accounts do we own the assets in? What is the market value and cost base of those investments?

What are our real estate assets? Who owns the property or properties? What is the market value and cost base of those properties?

In taxable accounts, do we have any capital losses or carryovers?

What is the contribution room left in our taxable accounts?

And more…

Through the question and answer session it was clear this wasn’t just about what I had saved and what I wanted to invest, it was a dissection of everything we owned and didn’t yet own (including our home). I was told this assessment was important for many reasons, one of them being to minimize taxes by allocating the appropriate funds to our registered and non-registered accounts.

Step 2 – What do you need? (Save me from me)

Following the asset tally, there was then a discussion about the bigger picture. What is my money for? What are my goals? Why do we want to invest at all? What are my investing preferences (or biases)? This part of the interview was done to learn more about me, the investor, what makes me tick; not just about what my wife and I had accumulated to date. I know why they do this. They want to help save me from me (from my bad investing behavior).

Step 3 – Putting it together (Draft Portfolio)

By analyzing what I have and also what I need – out comes a draft portfolio. I was actually surprised by the results.

Here is what my custom portfolio looks like (modified risk level 8):

This is not how I invest today.

I own a few dozen Canadian and U.S. dividend paying stocks. I also own a few low-cost Exchange Traded Funds (ETFs) for worldwide diversification – although different ones from those above. The draft portfolio definitely suggested a different path for me. Without hesitation Navid responded to some questions I had about this, with some good answers to consider.

Me:Navid, I don’t hold any bonds in my portfolio. I consider (rightly or wrongly) my defined benefit pension plan at work as a “big bond”. Because of this fixed (future) income and I take on more equity risk in my personal portfolio during my asset accumulation years – as in now. I get the VSB (Vanguard Canadian Short-Term Bond ETF) allocation but I was especially interested in the international (EM) bond allocation you designed for me. I’ve always read domestic bonds are better suited for you since you avoid currency risk with fixed income this way?

Navid: I agree you can view your pension plan as a fixed income investment however one thing to keep in mind about any pension plan is the risk of default. Some have minimal default risk (government plans), and others have much higher risk (think Nortel). The creditworthiness of the plan sponsor should also be taken into account when considering pension plans as a part of your retirement plan. That said our custom portfolios can be tailored to investors like you who have a defined benefit or defined contribution pension plan.

The emerging market bonds in our portfolios are all USD denominated sovereign bonds. They are hedged to Canadian dollars, so practically there is no currency risk. These bonds are expected to outperform local/U.S. bonds by a wide margin over the next 10 years given where interest rates are today (as in very low).

Me:Emerging market bonds aside, this was actually more bonds than I would have though Navid. Maybe that’s because of my bias to dividend stocks and equity ETFs? I was also surprised how much lower the % of Canadian equity (probably) should be in my portfolio. I guess I have a bit of a home country bias.

Navid: Most investors do Mark (have a home country bias). This is where we believe global diversification can help you (and most investors) in the long-run. Also, back to bonds, the higher allocation to bonds than what you might have expected is partly due to low long-term return expectations for equities. Research Affiliates (RA) does some great work in this area. Take a quick look at their long-term expectations for different asset classes here for you and your readers. Keep in mind their expectations are for a U.S. investor. We have adopted RA methodology for Canadian investors.

It was interesting to read those perspectives and advice. It has me thinking maybe my portfolio is too stock heavy and I’ll need bonds at some point. It also has me thinking I likely need more international assets as time goes on. I could be missing out on international equity returns. (I’m going to consider this.) Re-visiting and challenging my investing assumptions is a good thing. This is where I believe many robo-advisors like ModernAdvisor offer good value.

Value for money

To sum up – Custom Portfolios from ModernAdvisor offer investors a simple three-step process for building a simple low-cost but diversified portfolio – with the investors’ best interests in mind. I’m not quite ready to give up on my own DIY approach but I certainly believe this offering can benefit many investors. More specifically, this approach can provide holistic investment advice, investment tax optimization, automatic portfolio rebalancing, assets held in U.S. dollars if needed and much more. At the end of the day you’ll certainly keep more of your hard earned money, and keep that money working for you; far better than pricey mutual fund alternatives. Isn’t that a big part of the bottom line?

Image courtesy of ModernAdvisor.

As readers of My Own Advisor, Navid and his team have set-up a special offer.

There is normally a $500 setup fee for custom portfolios if you invest less than $150,000 with ModernAdvisor (the cost of putting together a robust plan for you). Readers of My Own Advisor will receive a $150 discount on this setup fee. All readers need to do is mention My Own Advisor (this blog) during the initial phone meeting and you’ll save money. That’s it.

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $600,000 now - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

Didn’t realize they had a $500 fee for new portfolios under $150,000. That’s a pretty big barrier to entry for most young investors. I’m a bit surprised given that $150,000 in investable assets would preclude many families from their service.

Owen,
There are many cheaper and diversified alternatives than robo-advisories. Don’t be taken in by all the slick marketing. I suggest you practice due diligence and know what you’re getting into before you initiate your investing journey.

I recall the fees for many robos are modest – around 0.5% even if you include the MER on the products. Those prices are decent for the advice you get as well. Do have people have to follow a robo? No, absolutely not but at least those opportunities are available for people. That’s a good thing. Competition in the financial sector is good – no?

I disagree Mark. 0.50% is a very high price to pay for a very basic rebalancing service. That’s $2,500 on a $500K portfolio which is a lot of money to charge someone for tying their shoes for them. IMO robos should be a free service offered by discount brokers, ETF providers or mutual funds companies, or $100/year max. I know my broker BMO InvestorLine used to offer something like this with for free with their “model portfolios”. They disappeared when robos came on the scene. More money to be made with smoke and mirrors I suppose.

If you invested $150,000 in your own individual stocks the fee will be $975 per yr less than the ETF’s. But I really wanted to expand on your initial statement:
“For one, all investors are constantly encouraged to take the long-term view. Focusing on what might happen 10, 20, or 30 years from now is not easy. You’ll need some major financial discipline to stick to a solid plan.”

Many worry about what to buy then WHEN to buy, but look at a 10 Yr chart for any of the solid DG stocks, say BCE, CNR, FTS, ENB, RY, etc. If one invested every month or quarter notice that at times you’d have bought at a high and other times a low, but over the 10 yr period your purchases would average lower than the current price. Also if you reinvested the dividends consider your growth in number of shares, income and portfolio value.

As you know cannew I’m a big fan of my own journey – but that’s my bias 🙂

I think for many investors that are not nearly as passionate (nor are experienced) as you (or me??) then owning low-cost ETFs is the way to go. Yes, investors could absolutely buy the stocks you mentioned (BCE, CNR, FTS, ENB, RY, etc.) and likely do very well for decades to come. I’ve been very pleased with my own DIY journey.

However, I have found investors who want diversification and the behavioural support to stick to their plan would benefit greatly from a robo-advisor. I wouldn’t rule it out personally myself – maybe – eventually. We’ll see!

I’m a dividend growth stock guy who doesn’t own any ETFs other than ZWH. I’m not advocating one should follow my route as its hands on and not for everyone. I say each to their own but, for the life of me, I can’t understand why someone would prefer to waste their investing money in a robo-advisory when there are whole world ETFs out there that will do the same thing for you at a fraction of the cost and all in a single ETF

Mark,
We all have our own view on investing. You and I are similar in some ways and differ in other ways. I don’t see the “good value” in robos when its so darned easy these days to craft and rebalance your own portfolio, especially with indexed ETFs. Heck, one can even cover the equity index world with a single cheap (0.47% MER) ETF like “iShares MSCI World Index ETF (XWD).

I hear what you are saying Bernie but you read financial blogs, including this one, and seem to be very well versed in all things money. Do you think you represent the majority of the Canadian population? I don’t 🙂

This means for a small fee – many investors could use a helping hand. This is where robos help.

If you asked 10 people on the street about XWD ETF and said it had a modest MER to own large to mid-cap equities from around the world – 58% US equities and the rest from developed countries those 10 people, maybe 9, might think you had two heads. That’s all I’m saying.

This approach looks like a worthy consideration for investors not interested in DIY or needing help with a more disciplined behaviour – investors looking for a lower cost alternative to investment houses focusing on expensive mutual funds or higher cost service. Even with the upfront cost I could see how the MER savings would be made up in a relatively short time.

I had difficulty following the pie chart as there seemed to be an equity category missing. If I read it correctly bonds made up 36%. I also wasn’t sure what exactly the 3 bar chart represented.

I was interested in reading your take on bonds, international equity and home country bias. At this point I am not sold on EM bonds, but the research seems to indicate its a place to look to with those seeking diversification. International stocks have had quite a run in the past ~6 months – much more than N. America.

Agreed – if you need some discipline a low-cost robo-advisor can help. Certainly a big improvement over say spending >1% in money management fees in products you know nothing about and you never hear from your advisor.

The bar chart was (I believe) to identify assets for tax efficiency for me, based on my questionnaire vs. the “model” although I would also have some discretion on that in talking with one of Navid’s reps if not Navid himself.

I’m not quite yet sold on EM bonds so I would need to do more reading on those but I can appreciate Navid’s point.

I can certainly see where Navid is coming from with ex-US assets. International assets were due in some respect.

I think if I did not want to have individual stocks I’d just use the TD e-series funds. They have enough funds to diversify and their fees, while admittedly not the lowest, are low enough. They have a reasonably low pre-authorized monthly contribution amount and no trading fees.

I have and continue to have a partnership with ModernAdvisor. Although I don’t invest with them I do receive compensation if investors invest with them. That referral program is outlined here.https://www.modernadvisor.ca/#_a_MyOwnAdvisor

Should folks decide this is something they want to pursue then they will also get $150 off their $500 set-up fee for a Custom Portfolio.

I do accept posts like these from time to time from my partnerships; companies that I believe are delivering value to Canadians.

Interesting post, Mark. I think Robo advisers are fantastic as they help take behavioural errors out of investing, which is the most important part of investing. With my many nieces and nephews, I send them to Robo advisors unless they are particularly interesting in investing in which case I help them get started with a simple index portfolio.

I think ModernAdvisor’s portfolio in unnecessarily complicated. I think the same result can be achieved with simpler portfolio such as VXC/VCN/VAB. I think they do this for marketing reasons – complexity sells more easily than simplicity. Having Reits is fine, but it is not necessary to have EM bonds. These are really junk bonds (or high yield bonds) and therefore have equity like risk and return. You might as well just own more equities. You own bonds to reduce the volatility of your portfolio, not for return (you own stocks for that), so Navid saying EM bonds have a higher expected return is true, but doesn’t fit the reason you own bonds in the first place.

I agree with Navid that you have too much home country bias. This is common with DGI investors because it’s more difficult to buy individual stocks, especially outside of the US. The research shows the sweet spot for Canadian equities is about 30% of your equities with the rest split between the US and International including emerging markets.

I imagine that your suggested portfolio came up with more bonds than you thought because given you assets, planned continued savings and needs in retirement you are taking more risk (equities) than you need to take to achieve your goals. You can certainly choose to do that, but nice to know you could ease off if you wanted to. Or save less/spend more now.

Thanks Grant. I think you’re smart to encourage your nieces and nephews to consider robos. They can certainly learn the ropes if you will when it comes to investing for a much lower fee than I ever did!

I see what you are saying with VXC/VCN/VAB. I also think REITs would be helpful for many investors as well..ZRE, VRE, etc.

I’m not yet convinced on the bonds – I would need to do more reading including the EM bonds but I believe what Navid is saying: higher expected return.

I’m working on my home country bias by investing in more VYM and HDV over time, specifically. I personally find it difficult to invest outside NA. Maybe I need some work here 🙂

Good to hear from you Mordko. I know you’re a big fan of low-cost ETFs.

I think the bar chart might be representative of how existing assets should be rebalanced because I have a heavy Canadian bias right now. I recall Navid suggested for me my Canadian content should be no more than 30-40%.

I would have to read up on the EM bonds part more to be honest. I see Navid’s point but I would need to think through more how that fits into my personal portfolio. I do know I need to increase my US and international exposure more and will do so over time with VYM or HDV or VTI and for international likely VXUS.

VXUS is just 13 percent EM. Say you allocate 30% of your total portfolio to VXUS, it leaves just 3% of your overall investment in EM. In other words you will have no meaningful exposure to the market with the highest expected return.

This is why I prefer Navids approach of using VIU and VWO rather than lumping all ex US investments in VXUS. Also avoids duplicating Canada and allows to rebalance but the main reason is that I am looking for a meaningful exposure to EM.

Humm, good point, VXUS is more developed markets. What’s your take on Bogle himself not owning any international investments? He’s pretty much a fan of VTI, given the multinational nature of many U.S. blue chippers.

Mordko, actually VXUS has 19.7% EM, the world market cap, exactly what you want if you are investing on market cap basis. Now, if you choose to overweight EM, then that’s a different matter altogether.

John Bogle is making a political/judgement call that companies with headquarters in the US will continue to outperform – as they have for the moast of the last century. Of course someone living at the end of the 19th century could have decided to invest in Britain and exclude the emerging market of N America.

I don’t know the future and see no reason to exclude various Alibabas, Taiwanees electronics companies (best governance ever), Czech, Polish or even Russian companies. Sure, some of this countries have problems but that’s why their companies are trading at P/E of less than 10 vs US companies which trade at P/E of 30. And its not like US is without problems or risks.

The fact US has had stellar growth while EM stagnated over the last 10 years is the exact reason why EM has higher expected returns going forward.

That’s true…I suppose this is ultimately the lesson of diversification then – you are betting on the future by owning most markets vs. reliance of past performance on any given market.

I’m not quite convinced myself (yet!) that EM will outpace the NA market. Even if that occurs, it will be only for a short period of time since any market earning > 10% year over year over year is not sustainable.

Mark, due to current low valuations of EM equities, (cyclically adjusted P/E of 15), are likely to outperform US equities whose CAPE is now 30. In fact, expected returns of EM stocks are now 9% and US equities 6%. EM market equities started going up a year ago – one year returns are 30.2% (XEC) compared to US, 22.1%, (VUN) and Canada 13.1% (VCN). It’s impossible to predict these turning points which is why a fixed allocation strategy with rebalancing, so you are buying low and selling high, works well.

Any of the low cost broad broad market Vanguard or iShares products are fine, except currency hedging is not recommended as you lose the currency diversification and end up with a more volatile portfolio. I like the Vanguard ETFs because of the mutually owned structure of the company. VDU/VEE or XEF/XEC is good if you actually do the re balancing when the time comes, or otherwise VXC or XAW as you suggest with your Canadian stocks is a good alternative.

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Mark Seed is one of Canada's leading personal finance and investing bloggers. As my own DIY financial advisor we've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement.

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